China's economy: paying the price for cheap goods

Posted by Alexander Hay

As Chinese labour's costs rise, the days of cheap goods are over

The days of rock-bottom prices from China may be at an endWhile no one was looking, something significant happened in China.

No earthquakes, tsunamis, popular revolutions or royal weddings happened there though. Instead, a shift in all our lives is about to happen - the cost of labour in China is going up.

How is this important? Scarcity equals expense. Much as the Black Death improved the lot of the peasant by making him so thin on the ground that his masters would have to pay more for his services, so China's boom is coming to an end as it is beginning to run out of workers. Those that remain are increasingly at a premium, meaning factories will have to pay more to keep their staff onboard.

So far, so good. Given the unhealthy nature of much Chinese heavy industry, the workers do deserve a bigger cut of the action. Perhaps the PRC is now beginning to realise that forcing its population to have only one child per couple is bad news for countries that need to keep their labour pool brimming. This is a good thing, at least for the short term.

For us pampered, well-off and generally rather lucky consumers in the West, however, this is bad news. Cheap labour makes cheap goods and the received wisdom is that the world can be run on underpaid people abroad making the goods, while we employ our own populations to sell them once they're imported via value-for-money container ships.

Such cheap products meant huge profits for companies that carried on charging much the same price as before, and if our own manufacturing withered on the vine, who was to care? The West's rust belts could just go hang while the rest of us revelled in cheap toasters and DVD players.

Such a model could never last. Dependent as it is on readily available fossil fuels, the system will eventually become untenable as oil becomes ever more costly.

Meanwhile, our consumer boom, based on cheap credit and not very much else, lead to both high trade deficits and an over-reliance on selling other people's output. The 2008 recession may not have disabused us of this model yet, but the next crash certainly will. Where will our jobs and financial growth come from then? Certainly not from the much-hyped knowledge economy, not when it now costs £27,000 a degree.

It certainly won't be via a high street full of cheap Chinese goods either. As wages rise, so the cost to make things will rise too. If China follows the pattern of other industrial nations, this will mean conflict between workers and management, and companies looking elsewhere in the never-ending quest to find somewhere with enough desperate, hard-working people to pass false economies onto the West.

The crisis for this sort of Volume Consumerism will come when there are no more cheap workers to exploit, but as China has both the infrastructure and the numbers (for now) to keep on making cheap goods (albeit, no longer as cheaply as before), it won't collapse overnight.

The real losers will be us. Rising prices in the shops will impact on inflation, which was kept under control by keeping prices down and so restrict the rates of our own pay. (One gets the impression that we're all guilty of ripping ourselves off.) This will impact badly on our still not entirely healthy economy. Though, perhaps, the desperate drive to force down earnings while letting inflation and funny money run amok in the housing market suggests we're run by politicians and business men who really aren't all that clever.

Unlike the Chinese masses, who know the virtues of both looking after your own interests in the long term and being large and angry enough to make their rulers desperate to mollify them with jobs and economic growth in the first place. We, meanwhile, may soon have to relearn the real value of things and the need to wean ourselves off other people's hard work.

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Alexander Hay

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